It’s easy to see why investors head for Asia-focused banking company Standard Chartered (LSE: STAN) when they are hunting for an income stream. After all, at today’s share price of 1202p, the forward dividend yield is running at about 4.5% for 2015 and City analysts expect underlying earnings to cover the payout around 2.3 times that year.
However, a peek at the four-year share-price chart reveals a slipping share price and I think that’s what we should expect from out-and-out cyclical companies like Standard Chartered mid-macro-economic cycle.
How is that dividend paid?
The thing to remember about dividends is the only thing that pays them is cash. If a company doesn’t have the cash, it can’t pay the dividend, so it follows that a company paying a dividend is showing that its cash flow is sound, right?
Wrong. Companies seem to pay dividends for all sorts of reasons, even if they don’t have enough cash coming in. When we look at Standard Chartered’s recent trading we see a record of rising profits, with cash flow that has bounced back from its post-financial crisis lows. That seems a better performance on cash flow than some of the firm’s London-listed banking peers:
| 2009 | 2010 | 2011 | 2012 | 2013 | |
| Operating profit ($m) | 5,130 | 6,080 | 6,701 | 8,061 | 8,584 |
| Net cash from operations ($m) | (4,754) | (16,635) | 18,370 | 17,863 | 9,305 |
Standard Chartered is big in emerging markets and derives about 82% of its operating profit from Asia and 10% from Africa. Recent well-reported jitters in up-and-coming regions of the world can’t be helping the share price but, as with all cyclical companies, there’s probably a valuation-compression dynamic fighting against total investor returns as the macro-economic cycle rolls out.
Dividend growth
Standard Chartered’s progress on earnings and cash flow reflects in the record of rising dividends:
| 2009 | 2010 | 2011 | 2012 | 2013 | |
| Dividends per share (cents) | 66 | 70 | 76 | 84 | 86 |
So, we have a return from dividend income battling it out with attrition from a slipping share price to nullify total returns. That’s the problem with investing in cyclical companies; they are tricky, particularly when we miss the early stage of a cyclical up leg where the cyclical firms tend to provide the biggest shareholder gains.
Over the top of all of that with Standard Chartered, we have the odour of potential strong growth thanks to the firm’s strong position in fast-growing regions.
What now?
The cyclicality of the finance sector keeps me out of most banking shares, even Standard Chartered. They are just too difficult to time.
